Wednesday, April 18, 2007

The High Cost of Easy Credit

Steve Woodruff of the Missoulian (Montana) wrote an opinion piece about property flipping which touches the heart of the problem when it comes to property speculation caused by easy credit.

Of greater concern locally is the reality that people seeking quick profits help bid up the price of housing. When people seeking to maximize their investment gains shop for second or third houses as an alternative to buying, say, stocks and bonds, families seeking the American Dream of owning a home wind up in a bidding war.

It's a war the average Missoulian is losing.

Easy credit breeds speculation. While I am not opposed to people putting their money at risk I am greatly worried that something like the Greenspan Put will socialize the cost of failed speculation. Risk without cost is asking for the worst sort of financial fraud and mindless speculation.

Last month, the Missoula Organization of Realtors reported that the median price of a Missoula home was $206,850 - up nearly $20,000 over the past year alone. To afford the median-priced house in this town, you'd need a household income of more than $58,000. The median household income in Missoula, however, is just $43,200. What that means is the average family can't afford the average home in our town.

This is a huge and increasing problem, reflected in part by the closure of several Missoula schools: Young families with school-aged children find it difficult to live here. Mortgage foreclosures are up more than 20 percent over the past two years, suggesting even people who manage to buy homes here can't always afford them. The percentage of Missoulians who own homes hovers at 50 percent, far below the national average of 68 percent.

Please read the whole article. I added a comment but I'll be darned if I can figure out what happened to it. So here it is.

Steve,

Excellent article on the effects of property speculation but you are missing the driving force behind it: cheap and easy credit. Speculators would not be able to drive prices higher if it weren't for the ease in which lenders lend to marginally credit worthy customers. The credit that is being extended is coming from banks who, in turn, are borrowing from our Federal reserve system. Ultimately, all speculative bubbles are caused by too easy credit coming from a central bank which doesn't reign in lending when the the signs of speculation, a disconnect between asset prices and income, are apparent.

Someday, probably after much economic pain, we must reform our monetary system so that asset price inflation is targeted in the same way that consumer price inflation. Or we should go back to the gold standard. Either way, specualtion is an intergenerational transfer of wealth which is profoundly destructive to society.

Upon reflection I think this article is giving us a glimpse of the future. Childless, elderly Boomer couples driving middle and working class families out of desireable neighborhoods by refusing to fund public schools.